Observations on economics, the academy, the wider world, and things that run on rails.

9.9.18

THE SHAPE OF THE RAILROAD NETWORK TO COME?

Trains rail-blogger Malcolm Kenton muses on the potential for railroad infrastructure as an internal improvement.

Trucks impose the lion’s share of the wear and tear on roads and highways that consumes road maintainers’ budgets. They also make driving more stressful. Railroads, on the other hand, are (at least in theory) common carriers of freight with an obligation to serve any shipper that pays the established rate and meets logistical criteria. As such, railroads provide energy and space-efficient avenues for commerce, which lowers the cost of goods, means less air pollution than would otherwise result from all that freight moving by truck or air, and support numerous businesses of all sizes by serving as a keystone species in a commercial ecosystem.

That's a general-equilibrium argument in transportation policy, and general equilibrium analyses are hard to do in a market laden with irreversibilities and nonconvexities. But the freight railroads seem reluctant to invest in additional track capacity in order to compete more aggressively for shorter intermodal hauls (many of the small-town piggyback ramps of the 1950s and 1960s are gone, if, for that matter, the secondary lines are even there) and they vigorously resist the "passengerization" of their rights-of-way.

Perhaps ... I'm going to jump around a bit in Mr Kenton's column ... the railroad managers would just as soon the government go away, as it appears public policy continues to view the railroads as the Octopus of the Huntington and Morgan era, and it might be the better part of valor to not summon those echoes.

In the 1950s, the Association of American Railroads, the Class Is’ trade group, campaigned vociferously in public forums against the government’s punitive policy of taxing railroad property while at the same time heavily subsidizing railroads’ competing modes. Yet the AAR is strangely silent on this subject today — though the same policy dynamic remains, the group’s attitude seems to be that everything is hunky-dory as long as rate and service level regulation is not reintroduced. The AAR’s position seems more driven by the narrow short-term interests of railroad shareholders in the next quarter’s profits than by the broad long-term interest of the industry in maintaining reliable high-capacity avenues for future business.

Those service levels, however: etiolated compared with the War, and perhaps the business isn't strong enough to attract capital investment beyond maintenance of the current state of good repair.

Conversely, railroads are liable for property taxes in most of the jurisdictions in which they own property, along with all other federal and state corporate taxes. This means that the more they improve their property (by adding capacity through double- and triple-tracking, upgrading signal systems, expanding or building new yards and terminals, etc.), the higher the property’s assessed value, and thus the more their tax bills rise. Economists call this a perverse incentive, as current tax policy prompts railroads to minimize their physical plant and unnecessarily constrain their capacity.

Over 100,000 track miles have been lost because of this. Fred Frailey’s observations from his recent Empire Builder trip provide an example of the consequences of a lack of fluidity due to reduced track capacity — a situation that in the long term is untenable for both the host railroad and Amtrak. And this occurs on the only Class I railroad that is not publicly traded. Yes, maintenance costs can also rise with more trackage to maintain, but track maintenance — unlike paying taxes — is optional at the margin. A railroad can keep track in place but not maintain it unless and until it is needed in the future, but property taxation penalizes this approach.

That downsizing is a false economy, but perhaps the problem of playing well with Amtrak will go away in a way that echoes how the investor-owned railroads got to get rid of their fast day trains.

The American people, by means of our government, give private commercial railroads the unique privilege of controlling significant stretches of land and being immune from a number of state and local laws and ordinances, while also being subject to minimal regulation with regards to rates and service levels. The government has also recently imposed a hefty unfunded mandate on the railroads in the form of positive train control (which could have been approached in a more holistic manner that would produce benefits for railroads and their users beyond safety, but I digress).

With respect to that "controlling significant stretches of land," there seems to be no limit to the efforts of people living near the railroad to hamper expansion of rail service. It's only getting more ridiculous around Glenview, but that's for another day. That positive train control mandate might be (I'm not connected enough to sources to confirm or deny) a way for Amtrak to end the national network by refusing to run trains on tracks not equipped with the control. Seventy years ago, the private sector railroads used a similar unfunded mandate, the one limiting train speeds to 79 mph on tracks not equipped with cab signalling and automatic train stop or automatic train control, to reduce the speeds of their day trains, thus suggesting the return on investment to keeping the passenger trains fast wasn't favorable.

Alternatively, might a different approach to taxation and to the use of rail property for internal improvements be desirable?

What would happen if state and local governments, perhaps as part of a trial exercise in part of the country, stopped charging railroads property taxes, or only charged them a small flat per-acre rate that would not vary with the property’s assessed value? Perhaps this relatively simple change in public policy would incentivize railroads to make improvements and expand capacity in ways they may currently disfavor because of the tax consequences.

Tax incentives tend not to excite anybody other than public finance economists, and the empirical evidence on tax effects is sketchy. On the other hand, treating the rail rights of way as something to be held in the public trust has potential.

The railroads should not, however, simply be relieved of this tax burden without the public getting something in return. Railroads thus relieved should be required, as a matter of federal policy, to set aside a certain percentage of capacity on a designated network of main lines for passenger service. This should be a more expansive network than the skeletal web of routes that Amtrak currently operates, and the amount of capacity set aside should be sufficient for at least three daily passenger train frequencies on the designated corridors, be they short- or long-distance routes.

Repeat with me: frequency, connectivity, dependability. "Capacity" becomes a Complex Proposition, as a 125 mph diesel train might take a slot or two away from an autorack, container, or fast refrigerator car train, but three or four ethanol, coal, general merchandise, or grain trains might be delayed. The comments Mr Kenton is receiving suggest that there's strong reader support for business as usual, including collecting property taxes from railroads.

Railroads could fulfill the obligation to host passenger trains either by operating passenger service in-house without subsidy (the property tax relief being granted in lieu of a direct subsidy), or by providing free or very-low-cost access to a private franchisee that is qualified by FRA and supported by the federal government and/or one or more state governments. This could be Amtrak or a company like Herzog or Keolis, or Amtrak could serve as the franchising authority in lieu of FRA. A greatly lowered cost of operating over host railroads, combined with a national rail passenger liability insurance pool, station-area real estate value capture, and other self-sustaining methods of funding passenger rail’s capital needs are what will ultimately enable the entire network to be operationally self-sufficient. Continuing to cut Amtrak’s operating costs to the bone under the current paradigm will only achieve the opposite of this end.

If you're going to talk about real estate value capture, you really ought have Brightline, which is development-oriented transportation supplementing a convenient way from cruise terminal to theme park, in the mix.